Supply chain dynamics under the proportional order-up-to replenishment policy: The role of the lead time
Abstract
We investigate how lead time affects supply chain dynamics under the proportional order-up-to (POUT) policy, a linear extension of the celebrated order-up-to (OUT) policy. The POUT policy has recently gained increasing attention in both academia and practice. We emphasise that autocorrelated demand processes—commonly observed in practice and widely studied in the literature—significantly influence how lead time affects a supply chain’s dynamics and economic performance. Our key findings challenge the conventional understanding of lead time. We show that reducing lead time does not always decrease order and net stock variances; instead, the impact of lead time reduction depends on the interaction between demand correlation and the POUT policy’s proportional controller. Moreover, we identify an even-odd lead time effect, whereby the parity of lead time influences the impact of lead time reduction, as well as the choice of the optimal proportional controller for maximising economic performance. These results contrast with the perception that lead time reduction always improves supply chain performance. Furthermore, we demonstrate that modifying the POUT policy by replacing the lead-time-ahead demand forecast with the mean demand eliminates the even-odd lead time effect. This modification also enhances economic performance in certain scenarios.